Dow Hits 13,000, But What Next?

By Sarah Morgan

The last time the Dow hit 13,000, stocks quickly proceeded to take a 50% nosedive. But as the index briefly crossed that milestone today, many advisers said the market looks a whole lot safer this time around.

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The Dow broke 13,000 several times on Tuesday, before ending the day at 12966, up 16 points. It has certainly been a long road back: While many investors have recovered the money they lost in 2008, others are still struggling to catch up. The average participant in a 401(k) plan broke even between 2007 and 2010, in investment returns alone, according to the most recent available data from Vanguard. However, the range of returns was fairly wide, from a more than 5% loss to greater than 5% gain, and about half of retirement plan participants lost money in those three years.

But it’s not just that market prices are nearly back to pre-crisis levels, say advisers — the market climate has also started to improve. “In the last few years, the market has been so much more news-driven, we’ve had short-term wild and random volatility that makes the markets much more difficult to anticipate,” says Mike McGervey, the president and founder of McGervey Wealth Management. In 2012, that volatility has dropped significantly, with daily market moves being much smaller. McGervey says his technical analysis of recent chart patterns suggests that if the Dow does break through 13,000, stocks will likely post gains in the next quarter, too.

As a result, McGervey says he has been shifting client money into stocks for the past six weeks, and will continue if stocks keep rising. Currently, as much as 80% of his clients’ stock portfolios are in equities (and 20% in cash), up considerably from 2011.

To be sure, not everyone is scooping up stocks right now. Steven Roge, the portfolio manager of R.W. Roge & Company, says corporate profit margins are at historic highs, and predicts they’ll eventually have to return to more normal levels – and bring share prices down with them. “We think returns over the next 10 years will still be fairly muted,” he says. Roge says investors should rebalance their portfolios to take some gains, and reinvest some of the proceeds in bonds.

Nevertheless, more bullish advisers point out that stocks look cheaper than they were last time they hit 13,000. In particular, some tech stocks have steadily grown earnings through the entire credit crisis, says Karl Mills, the president of Jurika, Mills & Keifer. For the quarter ending in June 2008, the S&P 500 had a price-to-earnings ratio of about 25, based on reported earnings; it’s now just 15.6.

Many pros say stocks also seem attractively valued relative to bonds. Buying bonds at today’s low yields pretty much guarantees losing money to inflation over the next decade, says Mills. On the other hand, snapping up stocks at today’s low valuations offers a very good chance of gains over the next decade, he says, with volatility along the way. He also recommends avoiding the hedged products that try to protect against downturns that were so popular last year. “They aren’t going to deliver the kind of returns they need because they have the parking brakes on,” he says. If stocks do fall, he says investors should see it as another buying opportunity.

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